Oil Gas and Coal Gas Ratio That sound you hear is the stampede of shale gas drillers away from dry gas plays. The irrational exuberance of shale gas drillers, chief amongst them Chesapeake’s voluble Aubrey McLendon, is leading to an impressive destruction of capital. The long run marginal cost is significantly above the current spot price. With natural gas storage bursting at the seams, natural gas is reverting to its historical nuisance byproduct as drilling moves to liquid rich plays. While not sustainable in the long term, the present pricing situation presents opportuinities to displace coal generation and some oil in the transport sector.

Natural gas is now cheaper than coal on a per unit energy basis, and a btu of natural gas also yields more electricity than coal. Only half of coal plants have scrubbers, with older plants now facing the decision of whether to upgrade or to switch to natural gas. Central Appalachian coal at $60/ton is now selling below its mining cost of $65 -$75/ton, which means there is limited scope for coal prices to adjust downwards should fuel switching accelerate.

In 2010 2.4% of US primary energy consumption in the transport sector came from natural. With the possibility of a strike on Iran, the oil/gas ratio could go significantly higher, which may result in a knee jerk narrowing of the CLNE oil/gas ratio spread as hands are wrung about $4/gallon gas.